Inventory Management - 7 Skills

To make smart business management decisions, you need to track key performance indicators - KPIs in trade . They can be called the main characteristics of the organization. Key indicators will clearly demonstrate how successful the current business project development strategy is. This is especially true for businesses aimed at retail or wholesale trade. Using indicators you will find out what can be changed to get better results. Metrics will tell you how to correct existing mistakes and prevent new ones. We offer our services for the implementation of a set of KPI indicators for trading enterprises.

The approach to company management based on KPI indicators has become widespread, but often KPIs are used exclusively for calculating employee remuneration. This approach is a significant simplification of the basic principles of working with key indicators. Read more about the company's management strategy using the balanced scorecard in our methodological article.

Key retail indicators

Despite the existence of a general list of characteristics of a trading enterprise, it is not necessary to calculate each of them. If you are able to roughly determine in which specific area there are problematic issues and only “hard” numbers are missing to develop corrective measures, then we suggest that you familiarize yourself with what retail trade indicators

• sales volume - is a display of the amount of products that you were able to sell over a particular time period. The obtained figures can help predict future revenue levels or develop ways to increase it. We recommend calculating the volume not only in monetary terms, but also by the piece. There may be situations where revenue remains at a stable level. It happens that the number of sales falls - this often happens when prices rise;
• average check - calculated by dividing the amount of revenue by the number of punched checks for the nth period. This indicator will allow you to track the dynamics of demand in case of changes in product positions. It directly depends on the purchasing power of people living near the point of sale. The lower the purchasing power, the lower the average bill and the more difficult it is to adjust. If the results seem disappointing or less than desired, then think about setting up an additional sales system (i.e., offer a related product included with any purchase);
• conversion rate is an informative parameter that plays a more significant role than other trading indicators . It should be measured on a regular basis if you care about the growth and development of your own business. Especially when changes are made to the established work process (for example, replacing personnel). It displays how many people from among the store visitors became buyers. It is calculated simply - the number of people who visited the trading platform is divided by the number of buyers per day/week/month, etc. The resulting numbers are the conversion percentage. Keep in mind that the more expensive the product and the longer its service life, the lower the conversion. Example - for stores selling food products, the ratio of customers to visitors will tend to 95%. And, for example, car dealerships barely reach 5%;
• number of returns - shows how many units of goods sold were returned during a specific period of time. As such, there is no average return rate and it is selected individually. But if the product is often returned, then it is imperative to determine the reason. The reason may be the low quality of the products offered, the discrepancy between the actual characteristics and the declared ones, etc.;
• salary intensity is an indicator of the ratio of expenses for employees in relation to revenue. The principle of calculation is to divide all funds spent on personnel within a certain time period by revenue. If during the measurement it turns out that salary intensity is increasing, but revenue is not, reconsider the salaries. It is also necessary to study bonuses for employees, the limit on the number of employees required for the full functioning of the enterprise;
• sales volume per transaction - the data obtained can be considered an indicator of service quality. The calculation method is the amount of revenue divided by the total number of transactions.

Revenue per square meter is one of the basic indicators

And the last item included in the KPI of a trading company is sales per square meter (also called specific turnover). It shows how effectively the retail space is used and is calculated as follows - revenue for the nth time is divided by the square footage of the usable area. It is easy to calculate this parameter, but it is somewhat more difficult to estimate. Therefore, in most cases, this indicator is relevant to calculate only when:

• opening a new store to predict potential profits;
• before renting a retail space to calculate the possible turnover to the cost of renting a square meter of space.

In addition, the measurement of the indicator is also used during the planning period for opening a retail outlet. In this case, you should take average data for the field of activity or similar store, and then, based on them, calculate the size of the premises required.

Please note that we have only listed the main indicators of retail trade, but they are quite sufficient to determine how efficiently your retail business is functioning.

Key KPI indicators in retail

There are several types of indicators in retail trade processes:

• personnel sales;
• conversion;
• average check size;
• the number of units of a product sold to one buyer.

For sales personnel , there is more than one indicator that measures the performance of each of them. First of all, it's volume. Next is an analysis of the assortment, as well as the price. And the amount of the employee’s income depends on the number and volume of goods or services sold.

Conversion determines the number of visitors who left the sales area with purchases. For example, 250 people visited the store, 75 of them purchased products and left with their purchases. Let's calculate the conversion: (75:250)*100 = 30%. This is a positive size for the store.

The average receipt shows the cost of the average purchase per day. The volume of total revenue per day is divided by the number of receipts. This indicator shows how loyal customers are to the store and whether they agree to unexpected expenses.

The number of units sold to one buyer characterizes the correctness of the product display and determines the percentage of influence of marketing activities aimed at increasing sales.

Main indicators of wholesale trade

The basis of KPIs in trade is turnover, which distinguishes them from retail trade. The indicator itself is determined based on a combination of the following subcategories:

• volume of products sold for a particular time period in current and comparable prices;
• quantity of goods sold on a certain day - how many total product items are sold per day, which can later be used to compare sales volumes on specific calendar dates;
• the size of sales of a specific type of product and product group from the total volume of trade turnover will help determine which of the company’s offers are in greatest demand;
• money spent on the purchase of goods - the parameter is necessary to calculate other trade indicators ;
• the dynamics of changes in trade turnover and the amount of inventory - make it possible to understand how turnover fluctuates, in which direction and whether the volume of products prepared for sale is increasing;
• speed of product turnover.

I often use KPI indicators exclusively for payroll calculations. This is a rather narrow understanding of the original principles that were laid down in the KPI system by its creators. We have prepared a description of the KPI methodology for managing the company's strategic goals.

In the case of wholesale trade, the main attention is focused on commodity turnover, since low circulation of products means an increase in financial costs. Consequently, a prolonged decline in the company's turnover means a drop in profits and an increase in the costs of trading operations. A decrease in goods turnover means a loss of market position and the ability to compete with other projects in one’s own field of activity, which is often associated with increased costs for purchases, sales, etc.

To correct the reduction in circulation, it is necessary to determine what volume of product items the enterprise is able to sell in current conditions (calculation of average costs, a forecast of the volume of goods that can be sold and what demand the products sold have are required).

The indicators of a trading enterprise are a direct “personification” of the company’s performance!

As the “verdict” of the article, we will indicate that without occasional calculation of trade parameters, it is impossible to create a business capable of progressive and high-quality development. If you do not pay due attention to measuring the above indicators, then the best thing that awaits a business project is economic stagnation.

And such a result can still be considered favorable, because often an inappropriate approach to calculating KPIs leads to a gradual decrease in sales and profits. It is extremely important to automate the calculation of indicators. If you need to spend a lot of time calculating indicators for analysis, you run the risk of not noticing changes in the operation of your enterprise at the right time. We suggest using the Finoko service to calculate KPIs; it allows you to collect information about actual data from all accounting systems, automatically identify trends in changes in indicators and display them in the form of a KPI panel.

Any successful business project not only stays afloat, but also expands solely due to the fact that its owner promptly assesses trade performance , takes measures to mitigate the consequences of incorrect decisions and sets a course towards the development of a wholesale/retail store.

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To learn more

KPI key performance indicators: examples in Excel

The stimulating factor in the KPI motivation system is monetary reward. It can be received by the employee who has completed the task assigned to him. The amount of the bonus/bonus depends on the performance of a particular employee in the reporting period. The amount of remuneration can be fixed or expressed as a percentage of the salary.

Each enterprise determines key performance indicators and the weight of each individually. The data depends on the company's objectives. For example:

1. The goal is to achieve a product sales plan of 500,000 rubles monthly. The key indicator is the sales plan. Measurement system: actual sales amount / planned sales amount.
2. The goal is to increase the amount of shipments in the period by 20%. The key indicator is the average shipment amount. Measurement system: actual average shipment / planned average shipment.
3. The goal is to increase the number of clients by 15% in a certain region. The key indicator is the number of clients in the enterprise database. Measurement system: actual number of clients / planned number of clients.

The enterprise also determines the spread of the coefficient (weights) independently. For example:

1. Fulfillment of the plan less than 80% is unacceptable.
2. Plan fulfillment 100% - coefficient 0.45.
3. Fulfillment of the plan 100-115% - coefficient 0.005 for every 5%.
4. No errors – coefficient 0.15.
5. There were no comments during the reporting period – coefficient 0.15.

This is only a possible option for determining motivational coefficients.

The key point in measuring KPI is the ratio of the actual indicator to the planned one. Almost always, an employee’s salary consists of a salary (fixed part) and a bonus (variable / variable part). The motivation coefficient influences the formation of the variable.

Let’s assume that the ratio of the constant and variable parts in the salary is 50 × 50. Key performance indicators and the weight of each of them:

Let us accept the following coefficient values ​​(the same for indicator 1 and indicator 2):

KPI table in Excel:

Explanations:

1. Salary – the fixed part of the salary depends on the number of hours worked. For convenience of calculations, we assumed that the fixed and variable parts of the salary are equal.
2. The percentage of fulfillment of the sales plan and work plan is calculated as the ratio of actual indicators to planned ones.
3. Coefficients are used to calculate the premium. Formulas in Excel for calculating KPI for each employee: We assumed that the impact of indicator 1 and indicator 2 on the amount of bonuses is the same. The coefficients are also equal. Therefore, to calculate indicator 1 and indicator 2, the same formulas are used (only the cell references change).
4. The formula for calculating the bonus amount to be accrued is =C3*(F3+G3). We multiply the planned bonus by the sum of indicator 1 and indicator 2 for each employee.
5. Salary – salary + bonus.

This is a sample KPI table in Excel. Each enterprise makes up its own (taking into account the characteristics of work and the bonus system).



Rule No. 7. Automation

Even with a very small assortment and a small number of stores, automation is necessary when placing orders. On the one hand, this minimizes the influence of the human factor on order accuracy. On the other hand, it shifts the focus of both managers and executives to truly strategic tasks that help the network make money: assortment management, relationships with suppliers, and other important things.

Successful inventory management relies heavily on common sense. By following these tips, you will be more effective and eliminate the headaches you have experienced in the past.

Interested in learning about the ABM Inventory inventory automation tool?

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Cash&Carry (wholesale and retail trade)

From the point of view of information technology, it combines, perhaps, all the most complex tasks from the B2B and B2C segments.

There are also wholesale sales in this trade segment. But this is small wholesale for small businesses, which is practically not automated. So wholesale sales there are not much different from sales in the retail sector.

There are also retail sales, but personalized records are kept. This is not just a sale to a private person in accordance with the public offer of a retail store. This is the same transaction under a purchase and sale agreement that is carried out on the B2B market, but only executed by a cash register. Therefore, information systems for Cash&Carry must have the functionality of commodity accounting systems for wholesale trade and be subject to the loads of retail trade automation systems.

And these are very extreme working conditions. In terms of reliability and fault tolerance, they are subject to the same requirements as retail systems, i.e. operability 24 x 7.

Rule #1: Divide and conquer

Inventory management should occur according to SKU-location. Each SKU must use its own inventory management algorithm, based on sales and supply characteristics, because the same product in different storage locations can be sold and delivered in completely different ways.

“Constellation of Beauty” retail chain , which has 70 stores scattered throughout Russia. In this case, deliveries are made from a central warehouse in Moscow. When delivering in the capital, lead times can be less than a week, but there is no point in delivering to the regions so often. In this case, lead times can reach 1-2 times a month. This suggests that the same product, which is sold in Moscow and in the regions, requires different inventory management mechanics.

Having analyzed the average daily online sales for the same SKU in different stores in the same region, we determined that the average can fluctuate up to 10 times. Due to the infrastructural features of the area in which the store is located and the infrastructural features of the store itself.